16 ★ FINANCIAL TIMES Thursday 30 January 2020
COMPANIES
L AU R A N O O N A N— N E W YO R K
Goldman Sachshas promised a sharp
improvement in profitability in an
attempt to quell shareholder concerns
that the once-undisputed champion of
Wall Street has lost its touch.
At the first investor day in its 150-year
history, Goldman said that it aimed to
achieve a 14 per cent return on tangible
equity by 2022. The target, which
includes $1.3bn of cost savings during
the next three years, would be a signifi-
cant improvement on its latest return of
10.6 per cent.
Yet yesterday’s long-awaited presen-
tation failed to spark a positive response
from the market. Goldman’s shares,
which lagged rivals for much of the last
decade, fell 2 per cent in early trading.
“We are planting seeds that will take
time to mature and grow,” chief execu-
tiveDavid Solomontold investors.
Goldman has struggled to adapt to
post-crisis regulations, which have
hampered banks’ ability to make out-
sized returns. Rivals such asJPMorganChasehave fared better in changing
their businesses and generating profits.
Goldman’s large bond and stock trad-
ing unit, which was its biggest asset in
the pre-crisis years, has been hurt since
2009 by plummeting margins, higher
capital charges and fierce competition
from hedge funds and other rivals.
To deal with sub-par returns, Gold-
man is trying to expand beyond its roots
in trading and investment banking into
more mundane services, such as current
accounts and credit cards.
MrSolomon said that, in the longer
term, the bank would “seek to achieve
returns in the mid-teens or higher” asnewer businesses, such as transaction
and consumer banking, “mature”.
Over the next five years, Goldman is
targeting $100bn of net inflows to its
alternatives investment business while
aiming to double consumer banking
deposits and add 300,000 individual cli-
ents to its wealth management busi-
ness. It also plans to establish a cash
management business with $1bn in rev-
enues and $50bn of deposit balances.
Brennan Hawkens, an analyst at UBS,
told clients that Goldman’s pledge to
add revenues from new business lines
“carries the greatest risk”.
Goldman’s revised targets put it morein line with those of peers such as
JPMorgan, whose retail bank and cash
management division helped it weather
a 50 per cent fall in trading revenues in
the decade after 2009. JPMorgan has a
medium-term goal of a return on tangi-
ble equity of about 17 per cent, while
Morgan Stanley’s is set in the 13-15 per
cent range for this year and next, with
15-17 per cent over the longer term.
Yesterday’s presentations laid bare
the challenging economics of the trad-
ing business, which Goldman revealed
had a return on equity of just 7 per cent
last year.
See LexPAT R I C K M C G E E— S A N F R A N C I S C O
The unexpected star ofApple’s record
quarterly earnings this week was none
other than the iPhone 11 — a product
widely considered more incremental
than breakthrough when it launched in
September.
Sales of the smartphone were
expected to be stagnant in the winter
holiday period, with analysts projecting
that the bulk of consumers considering
upgrades would hold back from buying
a new handset until Apple releases a
5G-enabled model.
But iPhone sales jumped 8 per cent
from a year ago to $56bn in the holiday
period, accounting for 61 per cent of
total revenue in Apple’s first fiscal quar-
ter results of 2020. That growth sur-
prised analysts and led total revenue to
rise 9 per cent to $91.8bn, beating the
most optimistic estimates.
“iPhone 11 was our top-selling model
every week during the December quar-
ter,” said chief executiveTim Cook.
Observers knew that iPhone sales
were going to be flattered by a compari-
son with the previous year, when they
had slipped 15 per cent to $52bn, but
“the result went far beyond that”, said
Neil Cybart, analyst at Above Avalon.
“The upgraders are starting to come
back. By no means is this some sort of
mega-upgrade cycle, but [after declin-
ing for several quarters] it looks like
iPhone unit sales were up around 15 per
cent,” he said.
That growth is likely to build support
for the new pricing strategy Apple
unveiled in September. After years of
slowly raising the price of its flagship
phone, Apple cut the starting price by
$50 to $699 — an affordability move
designed to lure more users into an eco-
system that is becoming more depend-
ent on a growing array of high-margin
services, such as warranties, streaming
content and App Store revenue.
Chief financial officerLuca Maestri
told the Financial Times the iPhone 11
performed well because of “a combina-
tion of the new features”, including a
better camera, longer battery life and a
faster processor, but also because of how
Apple is selling the product.
“We are doing more monthly instal-
ments, more trade-ins,” he said. “We are
making it more affordable.”
Frank Gillett, analyst at research firm
Forrester, said the i Phone sales under-
scored how users pay little attention to
the Android market because they are
locked into Apple’s ecosystem. “Many
customers aren’t buying for any flagship
feature, they are buying for the steady
reliability,” he said.
Even bullish analysts were taken
aback by sales growth for a phone that
largely caught up with rivals rather than
led them in a new direction.
“The innovation was basically cam-
eras and colours,” said Tom Forte, ana-
lyst at DA Davidson, whose estimates
over the next decade project that Apple
will record annual net profits exceeding
$100bn by 2028. “The iPhone 11 bene-fited from the lowest expectations for
any iPhone launch, ever.”
In after-market trading following the
results announcement on Tuesday,
Apple stock rose nearly 2 per cent,
bringing its valuation closer to $1.5tn.
Not every analyst is convinced the
momentum can be maintained. “If it
was me, I’d get my money the hell out of
there and call it a win,” said Trevor
White at Nucleus Research. He said he
was “shocked” by iPhone sales amid the
US-China trade spat but projects a slow-
down in the coming quarters.
For Wendy Johansson, consultant at
Publicis Sapient, it was Apple’s unusu-
ally wide guidance for the current quar-
ter that gave her pause. It projected rev-
enue of between $63bn and $67bn, a
gain of 9 to 15 per cent. Apple said the
wide range was a result of uncertainty
related to the coronavirus in China.
“That stood out,” Ms Johansson said.
“They aren’t diverse enough to with-
stand more coronavirus or more China
trade war. That is very worrisome.”
Another disappointment was Apple
declining to offer any sign-up figures for
TV+, its streaming video service, or the
Apple credit card. For many, the lack of
detail seemed at odds with Apple’s oth-
erwise enthusiastic embrace of “serv-
ices”, a division whose revenue climbed17 per cent to $12.7bn, overtaking Mac
sales for the first time.
“We never expected Apple to be Dis-
ney+ or Hulu or Netflix, but the fact is,
nobody talks about Apple shows,
nobody is looking at Apple streaming —
even though they opened it up beyond
their own ecosystem for once,” said Ms
Johansson.
“They made this foray into streaming
services and it’s not just working out for
them. They don’t have the content, they
don’t have the strength and they don’t
have the platform for that.”
What no analyst could dispute was
the success of Apple’s wearables busi-
ness. That unit, led by AirPods and the
Apple Watch, put in a good quarter, with
revenues rising 37 per cent to $10bn.
Mr Cook said Apple’s growing offering
of hardware devices beyond the iPhone
was playing a role in building its ecosys-
tem. Apple projects 600m paid sub-
scriptions for services by the end of
2020, up from 500m before.
“With each Apple product that a cus-
tomer buys, I think they get tighter into
the ecosystem,” Mr Cook told analysts.
“It’s more likely that the iPhone comes
first. But there is no doubt in my mind
that there are some people that came
into the ecosystem for the Watch.”
See FT Big Read and LexTechnology.Smartphones
Apple taps into iPhone 11’s ‘shocking’ success
Unpredicted jump in sales
buoys support for pricing
strategy but hurdles lie ahead
Banks
Goldman Sachs outlines comeback plan
Wall Street group aims to
achieve a 14% return on
tangible equity by 2022
Smart thinking:
visitors try out
the iPhone 11
Pro at an Apple
store launch in
Hong Kong in
September
Nicolas Asfouri/AFPAT T R AC TA M O O N E Y
I N V E S T M E N T C O R R E S P O N D E N TThe relationship between British
executives and their shareholders has
deteriorated to a nadir on the back of
intense scrutiny of listed businesses,
according to an influential group
representing big investors with £18.5tn
inassets.The Investor Forum, which lobbies UK
companies on behalf of big asset manag-
ers and pension funds, said chairmen
had told investors they would be
“better off” running private businesses
as shareholders pile pressure on listed
companies and a wave of cheap money
buoys the unlisted market.
“A lot of chairmen feel there are all
sorts of pressures that don’t exist in the
private world,” said Andy Griffiths,
executive director at the Investor
Forum. “The relationship between
shareholders and companies is
definitely at a low point.”
He said it was vital that UK public
markets were attractive for companies.
But he added many businesses and their
boards were struggling with the relent-
less examination from investors, who
had become increasingly vocal on issues
ranging from excessive executive pay to
carbon emissions.A new report from the Investor
Forum said the UK equity market was
facing severe challenges, including a
series of high-profile corporate failures
such as the collapse of travel company
Thomas Cooklast year, disappointing
investment returns and a fall in the
number of listed companies.
The number of initial public offerings
in London fell to a 10-year low in 2019,
according to EY, the consultancy.
The Investor Forum also said there
had been a hollowing out of research
providers in the wake of the European
regulatory package known as Mifid II,
“significantly reducing the availability
of comprehensive research on all but
the largest companies”.
The report added: “There is no doubt
that the effectiveness of public markets
is being questioned.”
At the same time private markets
have been buoyant, with record levels of
capital pouring in to be invested. Private
equity funds are sitting on $1.45tn in so-
called dry powder, or committed capital
that has not been invested, according to
data providerPreqin.
Investors such asLegal & General
Investment Management andAviva
Investorshave been taking a tough line
on stewardship issues in recent years,
including a lack of board diversity.
The Investor Forum, whose 50 mem-
bers includeStandard Life Aberdeen,
BlackRock andM&G Investments, said
it had targeted nine companies in 2019
includingGVC,First Group andVoda-
fone, on areas ranging from succession
planning to capital allocation.
The report noted that many chairs at
listed companies believed they would be
“better off” managing private compa-
nies given the constraints that the pub-
lic markets impose. Mr Griffiths said
shareholders and companies needed to
listen to each other better.Financials
Relations
between UK
boards and
investors at
‘low point’
N I C H O L A S M E G AW— LO N D O N
Santanderreassured investors about
its capital strength today, reporting
strongerthanexpectedresultsandpre-
dicting an acceleration in earnings
growth that lifted the Spanish bank’s
shareprice.
Ana Botín, executive chairman, said the
capital position had improved to such a
degree that by the year-end “we will not
need to keep accumulating capital and
will [have] additional strategic flexibil-
ity” to invest in growth or increase divi-
dend payouts.
Its common equity tier one ratio, a
key measure of balance sheet strength,
was 11.65 per cent at the end of 2019,
compared with 11.3 per cent the previ-
ous quarter. The bank said it expected
to be close to 12 per cent by the end of
this year.
Analysts and investors have persist-
ently raised concerns about capital lev-
els as they are lower than those of many
peers, but the bank has argued that its
diversification makes it more resistant
to economic shocks.
It also provided optimistic new profit
forecasts, predicting average earnings
per share increases in the “high single
digits” over the next three years. Ms
Botín said the bank was “well on trackto achieve our medium-term goals”.
The optimism came as the bank also
reported a solid fourth-quarter per-
formance that continued a recent pat-
tern of relying on rapid growth in Latin
America and the US to offset weakness
in Europe.
Total revenue of €12.3bn was 2 per
cent lower than the same quarter last
year, but in line with forecasts. Net
profit, however, increased 35 per cent to€2.8bn, compared with consensus fore-
casts of €2.6bn.
Yet this was not enough to offset one-
off charges taken earlier in the year, par-
ticularly a writedown in the value of its
UK business. As a result, net income for
the year fell 17 per cent to €6.5bn.
The UK was Santander’s only market
where profits fell on an underlying
basis, reflecting pressure on profit mar-
gins in the mortgage market. In con-
trast, profits in the US jumped 24 per
cent, while Mexico and Brazil climbed
19 per cent and 16 per cent respectively.
Santander has responded to difficul-
ties in the UK and Spain, where it suffers
from the impact of negative interest
rates, by planning to cut costs in Europe
while allocating more capital to higher-
growth regions.
Nathan Bostock, UK chief executive,
said the UK market “remains challeng-
ing with ongoing competitive pressures
and a demanding regulatory agenda”,
but that a “focus on cost efficiency is
starting to deliver tangible benefits”.Banks
Fillip for Santander after balance sheet fears
SA R A H N E V I L L E
G LO BA L P H A R M AC E U T I C A L S E D I TO RNovartis, the Swiss drugmaker,
reported sales up 9 per cent in constant
currency terms yesterday as it reaped
rewardsfromnewermedicines,includ-
ing a gene therapy that is one of the
world’smostexpensivetreatments.Vas Narasimhan, chief executive, hailed
“an exceptional 2019”, touting a pipe-
line of medicines that he claimed was
“unmatched, or close to unmatched, in
the industry”.
Shares rose modestly after the com-
pany announced net sales of $12.4bn in
the fourth quarter. A quartet of medi-
cines helped to drive the growth:
Entresto, for heart disease; Zolgensma,
its $2.1m gene therapy for spinal muscu-
lar atrophy; Cosentyx for psoriasis and
Kisqali for breast cancer.
The figure narrowly exceeded analyst
estimates. Sales for the full year were
also up 9 per cent.
Core operating income was $3.5bn, up13 per cent in constant currencies. In the
year it rose 17 per cent to exceed $14bn.
G u i d a n c e f o r 2 0 2 0 re m a i n e d
unchanged, with net sales expected to
expand by mid to high single digits and
core operating income expected to grow
by high single to low double digits.Since becoming chief executive two
years ago, Dr Narasimhan has stream-
lined Novartis by shedding parts of the
business unrelated to its core focus on
innovative medicines. He sold its 36.
per cent stake in a consumer health
joint venture withGlaxoSmithKlinefor
$13bn, disposed of part of itsSandoz
generic medicines business in the US
and spun offAlcon, its eyecare division.
Briefing reporters, Dr Narasimhanclaimed that Novartis was “the sole
[pharma] company that is over $200bn
market cap that is 100 per cent focused
on medicines, with over 80 per cent of
those sales coming from innovative
medicines”.
Last year he told the Financial Times
that he aimed to limit spending on deals
to about 5 per cent of its market capitali-
sation, as he sought to increase total
shareholder returns. Asked about that
yesterday, he said it was “not a hard and
fast rule and it is absolutely driven by
the assets we identify”. Novartis’s inter-
est was in companies that would deepen
its presence in its existing technologies,
such as cell and gene therapy, or its cho-
sen disease areas, such as ophthalmol-
ogy and cardiovascular.
Harry Kirsch, chief financial officer,
added that, while it was important not
to become “fixated” on the 5 per cent
figure, “what it clearly indicates is that
we don’t believe in large M&A and the
strategy is small bolt-on [acquisitions]”.
See LexPharmaceuticals
Novartis bolstered by novel gene therapy
‘We are
doing moremonthly
instalmentsand more
trade-ins.We are
making itmore
affordable’‘A lot of chairmen feel
there are all sorts of
pressures that don’t existin the private world’
‘We will not need to keep
accumulating capital and
will [have] additionalstrategic flexibility’
Pipeline of medicines
is ‘unmatched, or
close to unmatched,in the industry’
Strong iPhone sales bolster Apple
bnSource: company iPhone salesTotal group salesJANUARY 30 2020 Section:Companies Time: 29/1/2020 - 19: 33 User: jon.wright Page Name: CONEWS3, Part,Page,Edition: LON, 16 , 1